If your boss slaps a settlement agreement on our desk you’ve got a decision to make.

Sign it and you’re out of a job with potentially a sub-standard package to support you. Refuse it and you could face taking your chances in a disciplinary procedure or a redundancy situation.

Either way, it’s often a stressful experience, which can seriously affect your finances. Before you decide what to do, here’s what you should consider...

Tough conversation: How can you fight for a better deal in redundancy negotiations?

What is a settlement agreement?

Settlement agreements are legally binding agreements that set out the full terms of a settlement between an employer and an employee. Previously known as compromise agreements, settlement agreements came into force on 29 July 2013, as part of wider changes in employment laws.

The documents are usually given to employees when they are being made redundant, both on a voluntary and compulsory basis. However, settlement agreements are also offered to employees if an employer thinks he or she is performing badly in their job or is guilty of misconduct.

Settlement Agreements tend to be used when employers are paying more than the statutory minimum entitlement. The benefit to employer of paying more is that the settlement agreement gives the certainty of knowing there will be no dispute or claim afterwards

You receive a sum of money in return for losing your job and certain employment rights, such as bringing a claim against your employer. The settlement agreement is the final sign-off before you leave work.

Each settlement agreement varies but typically, there are clauses that deal with:

Protected conversations

HOW MUCH IS STATUTORY REDUNDANCY PAY?

Statutory redundancy is calculated using a formula which is based on the length of service, your age and your weekly pay.

You have to have worked for your employer for two years to qualify for statutory redundancy pay.

If you have, you get:

0.5 week’s pay for each full year worked when you’re under 22;

1 week’s pay for each full year worked when you’re between 22 and 41;

1.5 week’s pay for each full year worked when you’re 41 or older.

However, for the purposes of the calculation, pay is capped at £464 per week before any deductions. So, in effect, those earning above £24,128 will not see their level of pay reflected in the calculation.

If you’re given a settlement agreement, your employer is likely to also have a 'Pre-Termination Negotiation' with you. Pre-Termination Negotiations (otherwise known as a ‘protected conversations’) came into force at the same time as settlement agreements.

They allow employers to have frank discussions with employees about terminating their contracts.

'While you’re in the meeting, glean as much information as you possibly can as to why this settlement agreement is being offered and also how the severance package has been calculated,' says Fiona Martin, employment solicitor at Brighton-based Martin Searle Solicitors.

Anything that’s said in this discussion is ‘protected’ and cannot be used be either party against the other in an unfair dismissal claim.

However, there are exceptions: the conversation is not protected by the new laws in discrimination cases, whistleblowing or other automatically unfair dismissal claims.

Also, the negotiations no longer have to remain off-the-record if either party behaves badly during the process. In these cases, what was said during the ‘protected’ conversation could come out into the open during a subsequent employment tribunal.

'If discriminatory remarks or admissions are made by your manager or employer ensure you make a note of exactly what was said either at this meeting or straight afterwards as it is likely that you would then need to raise a grievance about these statements before issuing a claim in an employment tribunal,' says Martin.

What advice will you get?

Once you’ve signed a settlement agreement, there is no going back, which is why the legislation insists that you take independent legal advice on the terms and the effects of the settlement agreement. It is customary for the employer to pay for this, or at least make a significant contribution.

An employment solicitor can check if you’re getting a good deal, whether there are any hidden traps and whether you have any grounds for a claim against your employer – such as discrimination or unfair dismissal.

It is important to make sure the lawyer you choose is an employment specialist, says Jon Curtis, employment law partner at Sheffield-based firm Ironmonger Curtis Solicitors.

He says: 'Normally your employer will pay your solicitor’s fees up to a maximum, which is often between £250 - £500, plus VAT. But be careful as the fees can grow quickly, particularly if there is a negotiation. It’s a good idea to try and agree a fixed fee with your solicitor although this will not always be possible.'

Union representatives or even the Citizens Advice Bureau may also be able to help.

Consider your finances

An average to good negotiated settlement is equivalent to four to six month’s equivalent salary, including notice.

'But it can be more and also less,' says Philip Landau, employment partner at Landau Law: 'If you are on a longer notice period of, say, three months, then you would usually be looking at the six months plus level, but there are no set rules.'

ABOUT THE AUTHOR

Joanne O’Connell is founder of Settlementagreement.co.uk, an online consumer resource offering free guides on settlement agreements and help finding a specialist employment solicitor.

You can follow her at @SettleAgreement.

Once you know the terms, you need to look at your own finances, says Philippa Gee, managing director of Philippa Gee Wealth Management.

She says: 'However painful, you need to work out your outgoings. Go through bank statements to see what your spending has been over recent months and project that forward and then consider the implications if you were to be off work for a number of different times: three months, six months and twelve months.'

Along with working out how much you need to cover essentials like mortgage payments or rent, check any relevant insurance products, such as income protection, in case they’ll pay out while you search for a new job.

If you are being offered a settlement agreement because your boss is unhappy with your performance and would otherwise take you down a disciplinary procedure, it may be tempting to sign the agreement and avoid the hassle. But first, consider the money.

Martin says: 'Does the deal offer as much money as you would receive in salary if you completed a fair capability process which could take between three and six months? Even if you did not survive this process you would still be due your contractual notice pay on dismissal.'

If it’s not a good deal, now is the time to negotiate.

P45: It may be possible to improve your redundancy package at no extra cost to your employer.

Negotiate

An employment solicitor will examine your contract to make sure you are being provided with all your contractual rights. Along with the cash payment, the lawyer will also make sure you’re getting the best deal on relevant bonuses and pension payments as well as your correct contractual notice.

'They should also advise if the overall compensatory amount offered is fair,' says Martin.

There are ways that the package can be re-structured to make it more tax efficient for both the employer and employee. The first £30k of your compensation (non-notice element) is usually non-taxable, for example, which can boost the cash you receive into your bank account and sometimes there are even 'win-wins' for both parties, says Curtis.

The issue of what pay and benefits are taxed can be complicated. Payments in lieu are taxable but the employment lawyer will look at the contract and advise on what can be paid tax-free.

Curtis says: 'One example is a car. Sometimes an employer can transfer a car to an employee where they would not be prepared to transfer the cash value of that car to the employee.'

Some employers will offer career coaching or pay for further training to help you secure another job. Let your solicitor know what you want, and they can ask an employer to consider your request.

You could ask if it is possible to leave without working a notice period, or making it shorter.

An employer may well refuse but it can be a case of those who don’t ask, don’t get.

No deal?

If you don’t sign the agreement, then you preserve your full rights to make a claim against your employer but you’ll need to act quickly. There’s a strict time limit to issue of three months less one day for a routine unfair dismissal claim.